If sales of plant-based meat stalled in 2022, there are nevertheless some sources of resilience in the plant-based category with dairy-free milk, and specifically oat milk, keeping growing at a robust pace as illustrated by the Q4 figures from SunOpta (+23% sales growth for its plant-based milks with volumes up double digit, including +37% for oat milk) and by Oatly’s Q3 figures released at the end of 2022 (+17% at constant currency).
When considering that plant-based milk retails at 2x to 3x the price of traditional milk and could then have fallen victim to consumer spending cuts amid high inflation, the performances from SunOpta and Oatly suggest that plant-based milk is on a much more robust and secular growth path than plant-based meat, which has been struggling to turn one-time consumers into regular consumers due to taste, texture and pricing issues.
Plant-based milks have indeed been growing in popularity over the last few years as they address the very specific needs of a rising share of the population, who suffers from hypercholesterolemia, milk allergies, or lactose intolerance (which today affects more than a third of US individuals). They also benefit from the health halo around plant-based diets with several studies showing that eating fewer animal products helps with weight management, cardiovascular health and, in some cases, type 2 diabetes prevention (with the benefits varying greatly from one plant-based milk to the other).
In addition, as diets based on plants represent a way to lower greenhouse gas emissions (since they prevent animal farming), the generations that stand out the most for climate change activism are gradually shifting their milk consumption habits. In this context, a staggering 49% of Gen Z customers indicate that they feel uncomfortable when they ask for dairy milk in public.
Without a doubt and as evidenced by data, plant-based milk is emerging as the growth engine within the milk category: in 2021, while animal-based milk sales fell 2%, plant-based milk sales increased 4%. Over the previous three years, the segment has grown 33% and now represents a sizeable segment, making up 16% of total retail milk dollar sales. On retail shelves, oat milk is the star performer with sales up 22% in the last 12 months according to IRI as it offers a richer taste than peers and appears as one of the most sustainable plant-based milk options, using little water compared to almonds that are a water-intensive crop. Almond-based milk still accounts for 59% of alternative milk sales, but the share of oat and soy milks is rising fast.
To maintain this growth trajectory, alternative milk producers constantly look for novel ways to imitate the sensory experience and nutritional benefits of cow’s milk given that flavour, texture, and protein intake remain major challenges. For instance, oat and almond milks provides 3x and 8x less proteins than traditional milk.
Accordingly, manufacturers like Danone, the food giant behind the plant-based milk brands Silk, So Delicious, and Vega, plans to make sure that its products have the best nutritional levels in comparison to traditional cow’s milk. In this regard, Danone, which has been working with biotech company Brightseed, plans to reformulate more than 70% of its plant-based beverages to increase their nutrient density.
Nestlé is another food giant betting on the plant-based dairy trend. To address the protein intake aspect of its products, it uses precision fermentation, a method where fungi are altered to generate whey protein – the very same protein as the one which can be found in cow’s milk. Nestlé started to offer a new plant-based milk based on this process in a limited supply in California, to track consumer reactions and analyze preferences for factors such as texture, colour, and sweetness levels.
Nestlé’s fermentation process was originally developed by privately held Perfect Day, a company that debuted on the market in 2019 with ice cream. Since then, Perfect Day has collaborated with a number of other companies, whose products range from protein powder and cream cheese to candy bars and cake mixes, all of which use its animal-free dairy protein.
Needless to say, for all companies active in plant-based milk, vegan yogurt, ice cream, and cheese represent major expansion opportunities and are, for some of them, already growing fast.
Overall, we can reasonably expect the plant-based milk industry to sustain double digit growth in 2023-24 despite adverse macro conditions. Importantly, we are also witnessing encouraging signs of rationalization in the industry amid tighter financing conditions that could lead to improving margins.
Sweden-based Oatly notably, which has long been loss-making, started shifting towards an asset-light strategy by focusing on its oat base technology and by outsourcing manufacturing and packaging to a partner. This should materially reduce capex and financing needs and allow the company to reach its positive adjusted EBITDA target by the end of 2023.
Worth noting, SunOpta could benefit from this manufacturing outsourcing trend. The company’s plant-based division, that represents 60% of group sales and produces milks based on almond, oat, soy, rice, coconut and hemp, operates with the SunOpta label but also as a co-manufacturer for consumer-packaged goods firms and on behalf of private label businesses.
In conclusion, should market conditions improve and high-growth names stage a come-back, Oatly and, to a lower extent, SunOpta, would appear as attractive names offering robust underlying trends (and exposure to China reopening for Oatly) and valuations that are definitely back to earth with an average EV/sales around 1x. In the Oatly case, more clarity on the conditions of the upcoming $200-300 million capital raising would also be necessary to remove a major overhang and assess the potential dilution.